Management Tokens and why they are important

When we hear “governance,” we usually think of a top-down approach, like in government or a corporation. Someone manages a structure, while others follow instructions This is a traditional approach to managing an organ or a team, and this is what we are used to.

In traditional management, as a rule, there is a vertical of power and those who exercise supervision control. Below there is a team engaged in the implementation of new developments.

There are good reasons for using such structures. Basically, they come down to efficiency: in large communities, it is difficult to take into account all points of view, both in terms of organization and in terms of execution. That`s why we tend to elect only a few people for representing us, and this simplifies the process and allows us to make decisions efficiently.

But what if the decision makers are not elected?

In case power is accumulated in the hands of elected people without mandatory inclusivity, rest of the community may feel they do not have a right to vote. It also means that projects don’t represent the people who make them successful. And what is the result? A community is less involved in the project, and a project that reflects views of just a few interested and influential parties. Sounds quite centralized.

And what if the management itself could be decentralized?

Blockchain Reverses the Management Scenario

Blockchain has created a basis for the decentralization of the financial system. Previously, banks, governments and firms controlled our access to financial networks. And now the financial infrastructure offered by blockchain has enabled individuals to bypass these regulators and gain access to the financial system where no one controls the situation.

But when it comes to how organizations are managed inside this system (we are talking about separate blockchains and projects, and about the process of making decisions), you may be surprised to know that the power is still quite centralized. Let’s consider various management systems used and the latest changes that change the capabilities of users and projects themselves.

Blockchain Management Structures

• Off-chain management

According to Coinmarketrate.com, this informal approach to management combines on-chain execution and off-chain decision making processes.

With off-chain management, decisions are made outside the blockchain, that is, decisions are discussed at conferences and in written proposals, and then executed on the blockchain as part of a separate process. Instead of true decentralization, when managing off-chain, key participants (the leading development team or significant miners) fight for control through influence and strategy (something like politics).

And what is the result? A system that is again centered around influential people. Let us consider two leading cryptocurrencies which use the off-chain management system

Bitcoin

This is right, the leading crypto is the protocol that has shocked the world with the decentalization potential, and it uses the off-chain management.

In Bitcoin, all major changes that are proposed to be made to the network are discussed offline. This means that important decisions are made at conferences and through messages by important parties, such as the core development team, miners and, to some extent, the end user community. Thus, owning BTC may give you a say in conversations, but ultimately you don’t have a say. Proposals and development decisions are made centrally, and ultimately the activation of these new ideas is carried out by the nodes of the network.

Ethereum

Ethereum management model is quite similar to the model of Bitcoin. There is a core development team (headed by Vitalik Buterin), and any changes or modifications to the network are considered both publicly and during private discussions. Protocol users get the right to vote, but they do not have the kind of influence that could affect the changes.

What happens here is that governance is centralized around multiple stakeholders, and a few influential people get a real say in where the protocol can move. In other words, simple owning a certain amount of ETH does not give you a say in the management.

• Chain Management

If, when managing off-chain, important decisions are discussed informally by several key participants, then when managing on-chain, the entire process is transferred to the blockchain, and gives the right to vote to all interested parties.

Here, proposals are accepted or rejected using management tokens (we’ll talk about this below), which allow owners to vote for key decisions and weigh them taking into account their share in the project.

The key difference between off-chain and on-chain management is how and by whom decisions are made. When managing off-chain, very few parties really have a say in the process: by the time proposals get into the blockchain, they have already been determined and formed by several major votes, and even then the final acceptance of these proposals remains with the nodes, and not with the interested parties in the currency itself.

When managing on the chain, all changes are coordinated in the blockchain network, and are proportionally approved or rejected by everyone who owns the management token.

What is a management token?

If the blockchain has allowed the entire system to become decentralized, then management tokens take another step forward, allowing entities within this system to also decentralize.

Simply put, management tokens are crypto tokens that interact with the smart-contract of the blockchain, giving the owner a vote in the project. They are like a small voting chip that is issued to project participants to accept or reject proposed changes. This means that everyone who has a management token has the opportunity to take a direct part in where the protocol can move.

Each token gives the owner the right to vote in the ecosystem, which means that developers, big shots and large miners do not make decisions alone.

The beauty of management tokens is that they allow projects to become completely decentralized and autonomous, forming and activating a community by distributing control among users in an organized way, and from that moment on the hierarchy becomes virtually unnecessary.

This has already led to changes in how we organize and what we expect. For example, the nascent DAO ecosystem was created thanks to management tokens, allowing token holders to form a real community and be heard within this community.

This means that all kinds of DAOs, from creative projects to automated market makers (AMM) DAOs, investment DAOs and metaverses, were created thanks to the concept of a token that gives the community the opportunity to manage the project and dictate its future.

Management tokens in action

To get a better idea of exactly which projects use management tokens and how, let’s look at some striking examples.

• FINANCE (YFI)

Decentralization exists in the spectrum, and it makes sense to start with a project that expands the boundaries of this spectrum. YFI is the token behind the Yearn.finance project.

• Polkadot

Polkadot, a second-tier blockchain that seeks to make all networks compatible, solves this problem with a formalized system where Council members can be chosen by DOT holders to represent their interests, like members of parliament.

• DacimalChain

Decimal Chain is also a second-level blockchain, not only supports in-chain management, but has also carefully thought out how the voting processes will interact with the people behind the tokens to ensure the long-term success of the project. We can expect that as the blockchain ecosystem expands and develops, we will see this project more and more often.

• Ethereum Name Service (ENS)

An interesting trend related to the use of management tokens is to stimulate support for projects at early stages. The participants of the Ethereum Name Service (ENS) project received an award in the form of a huge reset of management tokens at the end of 2020, which caused a lot of excitement in the space. The price of the project’s native token (ENS) skyrocketed, and early adopters of the project received an immediate reward for their initial support, which caused a huge stir in the DeFi space and made many users wonder which projects would be the next to do the same.

• Decentraland и DAO

The Metaverse promises to offer users hyper-realistic online communities that mimic real life, but offer greater potential for global collaboration, creativity, and global self-governance. Therefore, it is quite logical that management tokens play an important role in the organization of votes within this system.

Decentraland, one of the largest social metaverse in this space, is a DAO run by holders of their own MANA tokens. They can use them to vote on decisions and proposals regarding the Decentraland ecosystem and its future. This includes the question of whether certain locations should be points of interest for users, scaling decisions, which members should be hired as DAO coordinators, banning some addresses for chatting, and a whole host of things that determine the future of metaverse and where it is going.

All of this can be done by a community that is physically scattered, but united around Decentraland management.

Conclusion

There can be little doubt that these tokens will change our expectations. Now, instead of just wanting financial rewards from projects in which investments have been directed, users expect that their loyalty will be rewarded with a share in the future of the project.

As it has become known from some recent drops, we cannot always predict when a project will launch its own management token or how the receiving wallets will be determined. But there are a few places you can pay attention to to get some idea of whether the project plans to launch its own management tokens or plans to become a DAO in the future.

This means studying the project roadmap, communicating with active members of the project community in Discord, reading the technical documentation of the project or viewing information about its tokens on EtherScan.

This requires a little technical analysis, but it can often give good information, much depends on the ability to use it.

VALUE, POWER AND RESPONSIBILITY

The distribution of power through management tokens means that the fate of the project is in the hands of its community.

Therefore, stay up to date, communicate with projects that interest you, and be sure to conduct your own research, and the reward will be the right to vote where it did not exist before.